Air Canada
said Thursday that it was in exclusive talks to buy travel-services specialist Transat A.T. Inc. in a move that would accelerate consolidation of the country’s airline industry.

The potential deal valued at around 520 million Canadian dollars (US$387 million) is the second announced this week and would leave just two carriers dominating the market, a development likely to draw intense political scrutiny.

Air Canada is already the country’s largest domestic and international airline, and buying Transat would make it by far the biggest player in routes to Europe, Latin America and the Caribbean. Transat has more than 30 jets and runs an airline and a tour operator.

On Monday, second-ranked
WestJet Airlines Ltd.
said it had agreed to be acquired for C$2.6 billion by
Onex Corp
, a private-equity firm. Onex, which tried to buy Air Canada 20 years ago, is paying a hefty premium for WestJet’s shares.

Transat said in March that it had received approaches, and said Thursday that its board recommended entering a 30-day exclusivity period with Air Canada. Canada’s flagship carrier is offering C$13 a share for Transat, or a 22.9% premium to Wednesday’s closing price of C$10.58.

Air Canada said it has all the necessary funding to complete the transaction, which it said would create a Montreal-based global travel-services company. Air Canada’s shares rose on news of the deal, climbing nearly 4% Thursday.

Any Air Canada-Transat deal, however, will come under scrutiny from Canada’s antitrust watchdog as well as the country’s transport minister, who under Canadian law has the final say on the transaction.

Canada’s transport department must ensure the deal doesn’t harm the public interest, as stipulated by law. “Public-interest concerns are a very big black box—we don’t know what goes into that recipe,” said
Michael Osborne,
a competition lawyer at Cassels Brock in Toronto. Representatives for
Marc Garneau,
Canada’s transport minister, didn’t immediately respond to a request for comment.

The combined company would have a 63% share of trans-Atlantic flights to and from Canada this summer and leapfrog Toronto-based Sunwing Travel Group with almost half the market on routes to Mexico and the Caribbean, judging from a market-share breakdown in a Transat investor presentation in March.

Air Canada, WestJet and Sunwing all operate the Boeing 737 MAX and have had to scramble for alternative aircraft following the global grounding of the jet following two fatal crashes. Air Canada has turned to Transat and other carriers including Qatar Airways to provide flights on its behalf.

Transat is moving to an all-
Airbus SE
fleet, including A321neo jets that could play a similar role to the MAX.

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